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What the IR35 reforms, coupled with a hard Brexit, could mean for the UK tech sector

Colin Morley, professional services director at recruitment firm Harvey Nash, spells out the possible consequences of the forthcoming IR35 tax reforms and the prospect of a “hard Brexit”

Britain’s technology industry is under attack. Not from overseas competitors or a lack of innovation, but from the politics and policies of our country. Specifically, I’m talking about IR35 and Brexit.

About 40% of UK technology workers are contractors, and an estimated one in three are immigrants, so the implications of these measures are far-reaching, potentially affecting innovation, salaries and even security. 

To better understand the potential effects of both, we need to understand the risks associated with each, starting with the IR35 (or off-payroll worker) reforms.

The government confirmed during the Autumn Statement on 23 November that its reformed IR35 regulations would come into force in April 2017, much to the chagrin of contractors and freelancers who work for the public sector.

Under IR35, contractors are treated as off-payroll, and are typically employed by a limited company of which they are a director – and, as such, avoid PAYE tax on their contracted earnings.

At present, it is up to the contractor or freelancer to self-declare themselves as either “inside or outside” IR35.

But from April 2017, responsibility for determining whether a contractor should be treated and taxed as an off-payroll worker or in the same way as a typical, salaried employee will fall to the public sector organisation that hired them or the intermediary or agency through which they were engaged.

The ambiguity of the regulation has left public sector organisations and agencies unsure how to determine whether someone falls inside or outside IR35, prompting some to give their contractors a choice between being taxed as an employee or having their contracts terminated.

This is exactly what happened at Ministry of Defence agency the UK Hydrographic Office (UKHO), resulting in a mass walkout by contractors.

Online tool for assessments

As part of the anticipated changes, HM Revenue and Customs (HMRC) is to provide intermediaries, agencies and public sector organisations with an online tool with which to make their assessments.

Given HMRC’s radio silence on how this tool will work, I personally question whether it will be ready in time for April 2017.

Should the UKHO approach be repeated across the public sector, we can expect to see a migration of contractors from the public to the private sector, and a significant rise in salaries, as contractors move to offset the cost of paying higher tax and national insurance contributions by demanding more pay.

The latter could result in a sharp rise in public sector spending and reallocation of budgets that were intended for innovation and system upgrades.

With no option but to become an employee (or at least have the tax status of an employee), it is likely that many UK contractors will seek pastures new overseas, particularly if HMRC decides to extend the changes to the private sector.

In an industry where such skills are already limited, the UK cannot afford an outflow of talent, particularly if a “hard Brexit” comes to fruition, which brings me to our next discussion point.

Hard Brexit hit on UK tech

Shortly after the vote to leave the European Union on 23 June, Harvey Nash polled 500 UK business leaders about how they thought Brexit would affect their companies.

The results showed that although almost half expected to see a drop in profits over the next five years, less than a quarter said they were planning a recruitment freeze and 62% said they considered Brexit an opportunity for the UK to innovate and reshape its relationship with the world.

Five months on and the sky hasn’t fallen in. The pound may have taken a hit against the euro and the dollar, but economic growth remains strong, helped in no small part by the country’s burgeoning tech industry.

Also, the recent High Court ruling that Parliament must vote on triggering Article 50 has eased fears about a hard Brexit being our favoured approach to leaving the EU.

Although this paints a rosy picture, we are not out of the woods yet and a hard Brexit, where the government’s insistence on controlling immigration trumps staying in the single market, remains a very real possibility.

It is also worth noting that the government is set to appeal against the High Court’s decision at the Supreme Court in December and, according to reports, is already drawing up bills to prevent MPs from holding the process up should it lose.

A rock and a hard place

Make no mistake, a hard Brexit would be bad for the tech industry because it would make it harder to recruit staff and could raise barriers to overseas trade.

On the skills front, Britain is already struggling to attract enough talent to meet the industry’s insatiable demand, and our own CIO report suggests that two-thirds of IT decision-makers feel that the technology skills shortage is hindering their organisation’s ability to keep up with the pace of change.

To meet demand, we have previously cast the net far and wide, relying heavily on our European neighbours, and beyond, to fill the gap.

A hard line on immigration and the free movement of people within the EU is almost certain to have a domino effect on the tech industry, underpinned by one of the most basic economic principles – supply versus demand.

Leaving the EU could also see Britain precluded from participating in (and benefiting from) the Digital Single Market, costing us investment and innovation.

Without going into too much detail, the Digital Single Market initiative is about the digitisation of industry. It is expected to create about £40bn of public and private investments, while building a digital environment for researchers and tech professionals to store data, share ideas and obtain advice.

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